THE CARE, CUSTODY, AND CONTROL
Is there a limit to its application?
By Paul Martin, CPCU
There is an exclusion in the Commercial General Liability (CGL) policy that is frequently cited as the reason to deny liability coverage for damage to personal property of others. And the application of the exclusion is usually applied correctly.
Exclusion j.(4) that applies to Coverage A states that there is no coverage for, “Property damage to: (4) Personal property in the care, custody or control of the insured.”
Interpretation of this policy language would seem to be straightforward to most. In most situations an insurance professional can imagine an application of the exclusion in a real-life scenario and the reasons for its presence in the form. Property that the insured controls but may not be theirs is best insured using first-party coverage such as Property of Others on a property form, or perhaps an inland marine form that covers that type of property.
Exceptions to the exclusion?
The CGL language itself has two specific exceptions at the end of the Exclusion j wording that apply to property damage to property in the care, custody and control of the insured.
One of the exceptions is for damage to premises rented to the named insured. This exception provides coverage for the legal obligations for property damage from any cause if the rental is for seven or fewer consecutive days, and for damage caused by fire only if rented more than seven consecutive days. These exceptions are subject to the separate limit found on the policy declarations for Damage to Premises Rented to you. The Exclusion j exceptions also include an exception for damage arising from liability assumed in a sidetrack agreement.
Given the two specific exceptions mentioned above, there are claim circumstances that could limit the application of the Exclusion j. (4) in the adjustment of a claim.
Courts around the country have considered arguments regarding the meaning of the exclusion based upon the facts of the accident and the owners of property. For example, one court considered the intent of the parties in the use and control of the property as a limiting factor. Another court ruled that the facts of the claim showed that actual care, custody, or control of the property by the insured did not exist at the time of loss.
Intent of the parties
Consider an absurd claim example to illustrate the issue of intent of the parties.
Assume an insured operates a specialty business making repairs to passenger jet lavatories. The business gets a call from the local airport regarding an airline needing to replace a fan motor of a vent in the lavatory of a Boeing 737. A technician of the insured is dispatched to the airport with the part and tools in hand. Upon arrival, the insured employee is escorted to the plane’s rear lavatory. During the work to replace the motor, the technician causes a short that starts a fire that spreads and destroys the aircraft.
Now, let’s consider the intent of the parties and the application of the exclusion language to this crazy claim scenario.
First, although the plane is large and expensive, it clearly is personal property (not real property) as described in the exclusion. Here are some questions to consider.
- Was it the intent of the airline to give the technician “custody” of the plane?
- Did the technician have “control” of the plane?
- Did the technician have access to the entire plane?
- Could he have gone into the cockpit, taken a seat, and started pushing buttons?
The answer to these questions clearly is “no.” No one arguing otherwise would be taken seriously in such a claims discussion. An argument could be made that the plane (the personal property) was in the “care” of the insured. But as the previous questions reveal, care would naturally be very limited.
Circumstances of the loss
This actual claim example illustrates how the circumstances of the accident can impact how the j. (4) exclusion should be applied.
The loss occurs. An agent insures a welding shop outside of a rural Texas town with a standard CGL policy. One day, a man in a flatbed truck pulls up and speaks to the owner. A pump permanently attached to the truck’s bed had a welded bracket that was broken. He asks the insured if he could reweld it for him. The insured agrees but tells the man that he is in the middle of another job, and if the man would leave it, he could get to it in a couple of hours. The man agrees and calls someone to pick him up.
A few hours later, the welder rolls his welding equipment outside to the parked truck and begins to reweld the bracket. The welder did not notice that the truck bed collected a lot of grease around the pump over time and was surprised when it ignited. A significant fire ensues.
The welder immediately jumps from the truck to the water hose on the side of his building. He turns on the water and races back to the truck, but the hose is not long enough. He then rushes to the cab of the truck in hopes of moving it closer to the hose. The doors were locked, and the driver had taken the keys. The truck eventually is fully engulfed for a total loss.
The claim is denied. The owner of the truck files a claim with his agent who insured it for physical damage using an inland marine Contractors Equipment form. The welder files a claim with his agent against his CGL policy for damage to the truck. The two claims turn into a standoff. The inland marine carrier is prepared to pay for the loss but is also prepared to subrogate against the welder. The CGL carrier denies the claim based upon exclusion j. (4).
An agreement is reached. The agent for the welder begins to explore what arguments could be made for coverage and against the denial. He eventually finds court cases that make the case that the facts of the claim can color the use of the exclusion. He argues with his insurance company that the insured did not have custody or control of the truck given the fact that he did not have access to the keys and thus was unable to control it. He also argues that when the owner took the keys with him, he was expressing that he was not giving the welder custody of the vehicle. After many weeks of arguing and consideration, both carriers got together and agreed to each pay half of the loss.
The CGL insurer decided the cost of litigating the loss, given the facts, was not worth the risk of a court not recognizing the exclusion. The inland marine insurer decided that paying half of the loss was better than an unsuccessful collection of a subrogation action against the welder with no insurance.
There is a temptation for insurance professionals to think they should be able to apply the coverage provided by insurance policies they sell or under-write to any loss, with clarity and confidence. There is value in that ambition, but humility and common sense tells us it does not always work that way.
Paul Martin is director of academic content at The National Alliance for Insurance Education & Research, headquartered in Austin, Texas. Paul works to develop, maintain, and deliver quality educational programs for the organization. Paul has over three decades in the insurance and risk management industry.